Getting your first loan is a major milestone in the life of any business because it has the potential to breathe life into your dreams. Whether you’re looking to grow your business, buy equipment, or solve pressing cash flow issues, your business may need to borrow money to accomplish its goals. There’s just one problem. As a newer company, your funding options might be limited.
But there’s good news, too. It’s true that if your time in business and your cash flow figures are weak, you may need to rely upon other fundability measures to borrow money. But that doesn’t mean it’s impossible to secure a small business startup loan. You simply need to learn how to play to your business’ strengths — like your own good personal credit rating — when you’re dealing with business lenders.
Read below for some highlights on the following types of funding options that might help you as you search for a first time business loan:
- Vendor Credit
- Business Credit Cards
- Equipment Financing
- Personal Business Loans
- SBA Microloans
- SBA 7(a) Loans
- First Time Business Grants
- The Nav Grant
- Invoice Factoring
- Merchant Cash Advances
First Time Business Loans
Vendor credit, also called trade credit, is a potential funding solution that can help small businesses (both new and old) stretch their dollars and improve their cash flow. In many cases your personal credit won’t be a factor when you apply for a new vendor credit account. However, you should always check with the vendor or supplier who is extending terms to your business to be sure.
Vendor credit also tends to be easy to qualify for even if your business is new or hasn’t established a commercial credit profile yet. Perhaps best of all, a well-managed vendor account may help you to build business credit moving forward.
As a business owner, one of the smartest things you can do for your company is to establish a solid credit rating. While laying the groundwork for good business credit might not help you immediately in terms of securing a small business loan or other form of financing, it’s a sound investment in the future of your business.
Vendor credit is often issued in small amounts. You might receive net-30 terms (buy now, pay in 30 days) from an office supply store or net-60 terms from another supplier. However, on its own vendor credit isn’t likely to solve all of your working capital needs.
Business Credit Cards
Another way to borrow money for your new business is to take advantage of business credit card offers. In fact, business credit cards can be a great fit for startups since your approval or denial typically hinges on your personal credit history and credit score, not your business credit, annual revenue, or other factors. This is great news if you have a good personal credit rating.
Just like vendor accounts, if you manage your new business credit card well, it can potentially be a powerful tool to help you establish commercial credit. It can also help you to solve working capital issues now and maybe even earn valuable rewards in the process. Best of all, as long as you pay off the full statement balance during your card’s interest-free grace period each month (aka by the due date), you can typically enjoy these perks without wasting money on expensive interest fees.
Now for the not-so-good news: you’ll most likely be required to sign a personal guarantee on a business credit card. (This is true for many small business loans and financing options.) A personal guarantee means that if your business doesn’t pay as agreed, you agree to be held responsible for those charges and your personal credit score could suffer damage.
Does your new business need to purchase equipment or machinery to operate? If so, you might worry that borrowing money for an expensive equipment purchase would be out of the question as a new business. Thankfully, that’s not necessarily the case. Sometimes younger businesses can qualify for equipment financing loans.
With equipment financing, the machinery or equipment you’re purchasing serves as collateral for the loan. This means that if your business has repayment issues, the lender can seize the asset and resell it to recoup some of its losses. The arrangement helps to reduce risk for the lender and, as a result, might improve your chances of qualifying. Plus, if your application is approved, an equipment loan might help you to establish business credit as an added bonus.
Some banks may not be willing to issue equipment loans to very young businesses. With some equipment financing providers, your business will need to have reached its first birthday before you’ll be eligible for an equipment loan or lease.
Personal Business Loans
Do you have a good personal credit? If so, you might be able to qualify for a personal loan without much difficulty. What you might not realize is that some business owners use personal loans to help fund their businesses — especially startups.
On the plus side, personal business loans tend to feature lower rates and easier qualification criteria when compared with many small business loans. The lender processes the loan application based on your personal credit history and personal credit score. Your time in business, business credit score, and other business factors aren’t considered.
Some lenders won’t let you use personal loans for business purposes. If your lender does allow it, it’s important to understand the level of personal risk you’re taking on for the loan.
If for some reason your business can’t pay the loan back as promised, your personal credit score could be damaged. You would also be held personally liable for the debt, regardless of whether you spend the funds on office equipment or a tropical vacation.
Finally, even if all the payments are made on time, your business won’t get any credit for that good payment history. Personal business loans don’t show up on business credit reports.
First Time Business Loans Government
The Small Business Administration, established in 1953, backs loans issued by banks, credit unions, and other lenders to small business owners in the United States. There are over a dozen SBA loan options and they’re known for their strict loan requirements and lengthy application processes. Yet SBA-backed loans are also known for having low down payments and being incredibly affordable due to the low interest rates generally offered by SBA lenders.
For most loans, the SBA doesn’t set a specific time in business requirement on business owners, leaving these borrowing options potentially open to newer businesses and sometimes even startups. But lenders may sometimes add on additional requirements of their own. In many cases, lenders will want to see that your company has been established for at least two years when you apply for an SBA loan.
The SBA Microloan Program is designed with newer businesses in mind. A qualified small business owner can use an SBA Microloan to borrow up to $50,000 for any of the following reasons:
- Start a new business
- Purchase equipment
- Access working capital
- Purchase supplies or inventory
Rates on these loans are usually between 8% – 13%. Your business will generally have up to six years to repay the loan, based on the terms set by your lender.
As with many other types of business financing, there’s a good chance you’ll be asked to put up collateral to secure an SBA Microloan. This might include business assets or even your own personal property.
SBA 7(a) Loans
The SBA’s most popular loan is its 7(a) program. An SBA 7(a) loan can be used to borrow up to $5 million in business capital for any of the following purposes:
- Access working capital
- Purchase equipment
- Purchase real estate
- Buy an existing business
- Refinance existing business debt
Interest rates usually range between Prime + 2.25% to Prime + 4.75%. Depending upon the type of loan you secure (and its purpose), your business may be able to repay it over 7, 10, or 25 years.
As mentioned, SBA loans are typically challenging to qualify for and the application can often take up to three months to be approved. If you need access to funding quickly, these are factors you should consider.
You’ll generally need excellent credit to qualify for this type of loan — ideally on both on the personal and the business side since the lender will check your FICO SBSS Score. You should also expect to sign a personal guarantee if you’re approved.
First Time Business Grants
If you’re interested in SBA loans, you may also like to learn more about how small business grants could help you turn your dream into reality. Small business grants are offered by any number of companies, nonprofits, and even the government itself.
The best feature of grants is the fact that your business doesn’t have to repay them. Of course, everyone likes the prospect of free money to fund their business goals. As a result, both the requirements and the competition for grants can be very steep.
Starting the Search
Ready to gather more information about first time business grants — government grants or otherwise? This helpful guide from Nav is a great place to start your search.
The guide will help you discover:
- How to find small business grants
- Tips on applying for small business grants
- The difference between business grants and business loans
- Potential downsides to business grants
- 11 private small business grants
- 9 government business grants
- 4 business grants for women
In addition to this guide, you may also be able to find industry-specific grants to apply for as well. This could be especially useful if your business operates in certain scientific, medical research, or conservation fields.
The Nav Grant
Nav offers a $10,000 grant designed to help you take your business to the next level. You can submit your entry between May 23rd and August 15th for a chance to win. In addition to the $10,000 grand prize winner, a $2,000 grant will be issued to the 1st runner up and a $1,000 grant will be issued to the 2nd runner-up.
First Time Business Loans with Bad Credit
When you’re struggling with credit problems, securing a first time business loan can be a big challenge. Nonetheless, depending upon your business you may still be able to qualify for funding.
Here are a few solutions that you may want to research if you need a first time business loan with bad credit. Just remember, you should approach any bad credit loan option with your eyes wide open. Bad credit financing options tend to charge more and/or have higher fees.
Invoice factoring isn’t a loan, but it could be a way for your business to access working capital quickly if you find yourself in a financial pinch. Do you operate a business that invoices its customers on one date but doesn’t get paid until some point in the future? Those gaps in the payment cycle can put serious strain on your company’s cash flow. With invoice factoring, your business’ unpaid invoices might be an asset you can use to secure financing.
Here’s a quick summary of how invoice factoring works.
- Through an invoice factoring arrangement, you can sell your unpaid invoices to a factoring company who might pay you 75%–90% of the outstanding invoices upfront.
- The factoring company collects the outstanding invoices from your customers.
- The rest of the money, minus factoring fees, will be paid to you after the invoices have been paid in full.
Invoice factoring is generally an expensive form of short-term financing. Depending upon your agreement, you might pay a factoring fee of .05% to 4% per month. (Don’t confuse monthly factoring fee with APR. The APR on these arrangements could easily translate into the high double digits.)
Of course, the actual amount you will pay can vary widely, so it’s wise to make sure you fully understand your agreement and read the fine print carefully upfront. It’s also wise to compare all of your borrowing options and use an invoice factoring calculator to make sure you understand the true cost of financing.
Merchant Cash Advances
A merchant cash advance is another form of business financing that isn’t a loan. A merchant cash advance is, however, a way for certain businesses that accept credit card payments to access working capital. You usually won’t have to fill out a lot of paperwork to qualify and your credit typically isn’t a factor.
Here’s how the process works.
- Quickly access between $200 to $250,000 in funds, based on the volume of your business’ credit card sales and other factors.
- The cash advance provider takes a portion of your daily credit card sales to repay the loan plus interest and fees.
Merchant cash advances can be incredibly expensive, with interest rates commonly soaring between 70% and 200%. They should only be used in emergency situations as a measure of last resort.
If you’re seriously considering using a merchant cash advance, be sure to compare your options first (this calculator may help). It’s crucial to understand the risks you’re taking before you make any commitments.
Figuring Out Where to Start
Every business is different — and that includes finding the right fit when it comes to borrowing money. If you’re a new business owner, taking out your first business loan can be especially overwhelming. But mastering the art of strategic borrowing has also helped many companies thrive and grow.
Just remember, it’s OK to take your time and do your homework. In fact, it’s smart not to rush when you’re researching first time business loans.
A free Nav account is a great place to start. You can get free access to your business and personal credit scores and reports in one place. You can also get personalized financing recommendations from over 110 business credit cards, loans, and more.
This article was originally written on August 7, 2019 and updated on October 21, 2020.